Political economy is the study of how the relationship between politics and economics shapes the balance of freedom and equality. States use several institutions to achieve their economic goals.
Critical to any economy are markets—the interactions between the forces of supply and demand, or how goods are services are exchanged. Another critical component of an economy is property—the ownership of those goods and services.
All states provide some measure of public goods—those services or goods that no one person or organization can own. States differ greatly in what they define as a public good, though national defense and public education are often seen as public goods. Social expenditures—the state’s spending on public benefits—incites furious debates over who benefits from, and pays for, public goods. One major source of public funding—and public debate—is taxation.
One basic way states seek to control the economy is through the creation and management of money. To manage money, states may rely on a central bank, a state institution that controls the flow money and how much it costs to borrow money in that economy. A central bank tries to reduce both inflation (when prices rise because there is too much money and not enough goods) and deflation (when prices drop because there is too little money and too many goods).
Many economic debates focus on regulations—the rules that the state sets to manage the production and exchange of goods or services. Trade is often a focus of regulation, where the state uses tariffs (taxes on imported goods), quotas, and other nontariff regulatory barriers (health, packaging, and other restrictions that make it more difficult for goods to be traded) to help its economy.
